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《中国教育2030年市场展望》.pdf
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China Education
The View from 2030
We see significant long-term potential in new business initiatives for K12 after-school
education players, but near-term uncertainty and volatility will be high.
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment
decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to FINRA restrictions on
communications with a subject company, public appearances and trading securities held by a research analyst account.
M
K12 after-school edu-
cation demand persists in view of fierce competition to enter China's
top universities, but it is becoming more diversified and fulfilled by
different products. We analyzed business models in Korea, Japan and
the US, and note that Korea (vs. Japan) has more diversified formats
and higher penetration of home study programs, which evolved in
the wake of Korea's 1980s-90s after-school tutoring (AST) ban. We
identify opportunities in China outside academic tutoring, including:
1) home study content and service providers, 2) smart learning plat-
forms/tools with advanced technology, 3) non-academic tutoring,
and 4) deep cooperation with schools as in-school service providers.
!"" !
#$%$We project that four subsegments –
non-academic tutoring, learning devices,
learning content, and education digitaliza-
tion – will grow at 3%, 14%, 17%, and 6%
CAGRs to reach Rmb685bn, Rmb106bn, Rmb102bn, and Rmb924bn
by 2030, in our base case, which assumes that students and parents
accept the new ways of learning, and that product offerings continue
to be optimized over the next few years amid a stable regulatory envi-
ronment with no unexpected headwinds. Our bull case suggests
CAGRs of 6%, 17% 23% and 9%, respectively, and our bear case sug-
gests 1%, 10%, 10% and 4%.
&" '"("" !"" We
believe content and technology are the keys to success, and that
leading players have both brand appeal and the ability to develop
quality products given their understanding of what parents and stu-
dents need. Assuming EDU and TAL continue to take share in the
combined subsegments' Rmb1.8tn market, it implies 2-3 times poten-
tial in long-term market cap by 2030. Discounting that back to now,
at about a 10% annual rate, still implies 30-40% upside for TAL and
EDU, and 100%+ for Youdao. We adopt an average of this long-term
discounted valuation and SOTP valuation, based on our F24 esti-
mates, to derive our price targets, with 10-30% upside, near term for
EDU and TAL.
)(""""""("(('(Travel restric-
tions in April and May resulted in near-term disruptions to student
recruitment and also course delivery, and therefore to revenue rec-
ognition for CEE and Offcn. The delay in the civil service entry exam
also had an impact on Offcn's revenue. While there has been a mar-
ginal improvement since June, and we still see vocational training as
a steadily growing sector longer term, we prefer CEE over Offcn.
*"!(""! + +""' The recent
MoE approval of temporary for-profit school certificates for private
universities in Heilongjiang at end-August has, in our view, kicked off
an official start to for-profit registry, and we anticipate formal certifi-
cate issuance to occur likely from end-2022 to 2023, with other prov-
inces to follow in next 1-2 years. This could gradually remove the
overhang that pressured the subsector's valuation; we would focus
on select investment in quality players.
,(- "(- . + /0# +( ' ("
"""!("+"Interest is
slowly returning to the education sector, but, in our view, the market
does not fully appreciate the long-term potential of new business
initiatives. We think the companies are on track to transform and
diversify, but near-term volatility could be significant as they are still
at an initial stage. We like EDU and TAL for their strong product devel-
opment capabilities, brand names, and sufficient cash to support the
transition. We expect vocational training to gradually recover from
near-term Covid impact, while higher education awaits the key cata-
lyst of for-profit registry.
Elsie Sheng assumes coverage of EDU, TAL, Youdao, CEE, and Offcn
with this report.
What’s Changed
Youdao Inc. From To
Price Target US$15.00 !"#$%&
TAL Education Group
Price Target US$4.40 !"#$&
Offcn Education Technology Co Ltd
Price Target Rmb6.20 '()$%&
China East Education Holdings Ltd
Price Target HK$6.70 *+",$%&
New Oriental Education & Technology
Price Target US$23.20 !"%$-&
The View from 2030
M
,
5
Investment Thesis
10
Resilient education demand, but it will become
more diversified
13
Overseas Examples of Possible Pathways
23
New Business Initiatives After "Double
Reduction" in China
24
#1. K12 non-academic tutoring - At early stage of
refining products; relatively slow market size
growth but opportunity for leading players to
gradually gain share
33
#2. Intelligent learning devices and home study
content/services – Academic learning demand
partly shifting to personalized smart self-
learning
38
#3. Edtech – 2G and 2B learning solutions and
technology
40
#4. Other areas the companies are exploring:
Overseas expansion and live-streaming
42
Long-term Potential with Near-term Uncertainty
46
Vocational Education - Gradual Recovery Post
Near-term Covid Disruptions
47
Earnings Estimate Changes and Valuation
52
Financial Summary
57
Appendix – What regulatory uncertainties
remain?
58
Risk Reward - New Oriental Education &
Technology (EDU.N)
60
Risk Reward - TAL Education Group (TAL.N)
62
Risk Reward - Youdao Inc. (DAO.N)
64
Risk Reward - China East Education Holdings Ltd
(0667.HK)
66
Risk Reward - Offcn Education Technology Co
Ltd (002607.SZ)
Contents
M
%
1"/"+ !(The response of Korean
education companies to the AST ban was to create more K12 home
learning programs and other educational materials, besides under-
ground 1on1 tutoring. In Japan, however, which had no such ban, in-
classroom AST remains the norm. Meanwhile, US education
companies are more focused on providing learning technologies and
platform support through edtech.
We found several models that could work in China, including:
• *!'("( "This model origi-
nated in Japan in the 1950s but quickly developed in Korea
during the AST ban as companies like Kyowon, Woongjin
Thinkbig, and Daekyo were founded in the 1980s. In this
model, companies send packages of study materials to stu-
dents and provide regular tutoring guidance. The service is
usually subscription-based and monetized via membership
fees. Nowadays these programs are digitized and can be more
personalized to students' needs.
• ," +2"(('
There are many edtech companies in the US that help stu-
dents with more efficient and personalized self-study pro-
grams or help schools and teachers manage and teach more
effectively (e.g., learning management system Desire2Learn,
personalized adaptive learning Knewton, Aleks and Riid).
There are also businesses offering mock university entrance
exams, such as Benesse in Japan.
Investment Thesis
A year after the introduction of China's "double reduction," regula-
tions, which aim to ease after-school pressures on students, we find
ourselves asking two questions:
1. Is education investible from a long-term point of view?
2. If so, what will the space look like by 2030?
We do see long-term opportunities in K12 after-school education as
business models transform, and we suggest select investments in
quality higher education schools as for-profit school registry is rolled
out over the next two years. However, we view the private preschool
and private K12 school segments as presenting much less favorable
investment opportunities. In this report, we mainly focus on the out-
look for K12 after-school education – the key debate in the space right
now.
.)1: We see opportunities in K12 after-school education, but short-term uncertainty and volatility will be substantial
China Education Status by 2030
Preschool K12 Higher education
School age population 2022-2030 CAGR -4.4% -2.1% -0.4%
GER 2021 88.1%
High school: 91.4%
Compulsory education: ~100%
57.8%
Student enrollment 2022-2030 CAGR -4.0% -1.8% 1.6%
Private school enrollment %
Private: 49%
Private for-profit: 12%
12% 24%
Regulatory target Affordable for all children
Lower student burden, refocus to
school education with public
schools as key part
To improve school quality
Investment implications:
Private school education
Not favorable, limited quota for
private for-profit preschools
Not favorable, with declining private
enrollment % and declining school
age population
Selective opportunities when for-
profit school registry gradually
rolls out
After school education
Transforming to new business models; will take time to gradually
ramp up, but potential for quality products/services
Source: NBS, MoE, Morgan Stanley Research.
To explore what long-term opportunities and business models may
be available, we looked at after-school education in countries like
Korea, Japan and the US.
/3"'' "'+ Korea's ban on after-
school tutoring in the 1980s and 1990s did not destroy demand so
much as force it into other channels. We expect similar developments
in China following the double reduction. The demand is still there,
especially as gaokao competition remains fierce. Instead, the big
change in China is on the supply side, as the majority of academic
tutoring institutions have closed and transformation is occurring.
M
/
• 4("(!"The number of educational institu-
tions in Korea providing non-academic tutoring services
picked up in the wake of the AST ban, and the penetration of
after-school education in non-academic subjects like art and
hobbies reached 41% in 2021 (63% for primary school stu-
dents, 24% for middle school and 15% for high school stu-
dents).
• 5 "" !6"(( An emphasis on improving
the quality of public education can generate government-
backed demand for content and technology. Japan has seen
private tutoring players provide content to public schools,
while in Korea and the US companies are also providing tech-
nology solutions to schools.
.)2: Breakdown of education companies' services by market cap – China could move to a combination of Korea and the US
K12 after
school
education
79%
Adult
education
19%
2B/2G
service
2%
Japan education market cap breakdown
K12 AST
35%
K12 Home
learning
program
18%
Education
content
13%
2B/2G
service
14%
Adult
education
6%
Language
education
7%
STEAM
education
4%
College test
prep
3%
Korea education market cap breakdown
Education
content
20%
Tertiary
education
26%
Edtech
4%
Workforce
training
16%
Child care
13%
Online edu
platform
11%
Online K12
education
7%
Language
learning
2%
Vocational
education
1%
US education market cap breakdown
Various
formats with
AST as
majority
Source: Refinitiv, Morgan Stanley Research.
7- "+6!"6'#$%$We analyzed the
market potential of these new businesses under bull, bear and base
case scenarios. Our bull case assumes new models are well received
by parents and students and achieve higher penetration than in our
base case, while our bear case assumes students do not adapt well
to the transformation and underground private tutoring remains
more popular.
Our calculation shows that learning content and devices will be the
fastest growing sub-sector from a relatively smaller base, while the
growth of non-academic tutoring likely will be stable given its target
students are young children – a demographic that is declining due to
China's low birth rate. But within this stable market, we think there
will be opportunities for quality players to gain share.
.)3: Potential size of China's K12 education market by 2030
564
75
59
739
685
106
102
924
874
136
152
1,109
505
33
24
528
- 200 400 600 800 1,000 1,200
K12 non academic tutoring
Intelligent learning device
Learning contents
Education digitalization
K12 Education After Double Reduction
2030 Bear 2030 Base 2030 Bull 2030 Bull 2021
3%
14%
17%
6%
Base CAGR
Source: Morgan Stanley Research estimates.
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